NEW YORK, May 10 Microsoft Corp (MSFT.O) plans
to buy Internet phone service Skype for $8.5 billion, a rich
price as it seeks to regain ground on growing rivals such as
Google Inc (GOOG.O).

Microsoft's interest in the money-losing but popular
service highlights a need to gain new customers for its Windows
and Office software. Skype has 145 million users on average
each month and has gained favor among small business users.

Skype delayed plans for an initial public offering expected
to raise $1 billion. It has been looking at other options,
including tie-ups with Facebook and Google. Such a deal was
seen as valuing Skype at $3 billion to $4 billion.
[ID:nN04117305].

The Luxembourg-based company, which allows people to make
calls at no charge but has also developed premium services,
would give Microsoft a foothold in the potentially lucrative
video-conferencing market as businesses shift to lower-cost
ways of communicating.

Skype could be combined with Microsoft software such as
Outlook to appeal to corporate users, while the voice and video
communications could link to Microsoft's Xbox live gaming.

Longer-term, Skype would offer Microsoft another route to
develop its mobile presence, an area it has already put more
energy and resources into as PC usage comes under threat.

Skype is set to become a new business division within
Microsoft with Skype Chief Executive Tony Bates in charge and
reporting directly to Microsoft CEO Steve Ballmer, Microsoft
said.

"It's a strategic asset and a defensive move," said BGC
Financial analyst Colin Gillis. "If they can put it on Windows
8, it gives them an advantage. It helps them in the tablet
market."

The Skype deal is the biggest in the 36-year history of the
world's largest software company. It was first reported late on
Monday by tech blog GigaOM.

The $8.5 billion price tag was a surprise. Although the sum
would not stretch cash-rich Microsoft, some said it was high
for a company whose ownership has changed several times during
its relatively short life.

"But if you consider (it) was just valued at about $2.5
billion 18 months ago when a chunk was sold off, then $8.5
billion seems generous and means Microsoft has a high wall to
climb to prove to investors that Skype is a necessary linchpin
for the company's online and mobile strategy," he added.

Skype, which was formed in 2003, was bought by ebay Inc
(EBAY.O) in 2005 for $3.1 billion. Last year it had in $860
million in revenue but posted a net loss of $7 million,
according to data in its initial public offering filing.

In 2009, eBay sold a majority stake in Skype to an investor
group including Silver Lake, the Canada Pension Plan Investment
Board and Andreessen Horowitz for $1.9 billion in cash and a
$125 million note. EBay retained about a third.
[ID:nN04117305]
(Additional reporting by Megan Davies, Bill Rigby and Sinead
Carew, Sakthi Prasad in Bangalore, Clare Jim in Taipei and
Melanie Lee in Singapore; Tarmo Virki in Helsinki and Nicola
Leske in Frankfurt; Writing by Alexander Smith; Editing by
Louise Heavens and Derek Caney)

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